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Is a business bank account necessary for me?

Updated: Dec 12, 2023

Five million individuals are engaged in self-employment, freelancing, contracting, or participating in the gig economy, whether as their primary or supplementary income source. While many can manage their finances with their regular bank accounts, there are instances when having a business account is essential or significantly simplifies financial separation.





For a substantial portion of the five million self-employed individuals, the line between business and personal finances often blurs, making it a somewhat ambiguous area.


Can you explain the concept of a business bank account?


A business bank account, at its core, isn't fundamentally different from a personal bank account. It is a dedicated financial account for managing your business's income and expenses. However, the range of features and services a business account offers can vary widely, from a basic money-in, money-out account to one that facilitates tasks like invoicing and payroll management (if you have employees) and aids in accounting and tax preparations. Regardless of your specific requirements, there's likely an account available to meet your needs.


While many seek free business banking, the concept doesn't quite mirror the free offerings commonly available for personal bank accounts.


Who should consider the necessity of opening a business bank account?


You must have a business bank account if...


- You have established your business as a limited company in the UK, meaning it's registered with Companies House. In this scenario, your business is legally distinct from you, and using a personal account for its financial transactions is inappropriate.


You DON'T necessarily need a business bank account if...


- You are a sole trader, freelancer, or engaged in contracting (without operating through a limited company), such as a hairdresser, research interviewer, journalist, TV producer, gardener, designer, or developer.

- You are involved in gig work, such as with Uber, TaskRabbit, or Deliveroo.


In these cases, there's no legal requirement to open a business account because, in the eyes of the law and tax authorities, your self-employment or business is considered an extension of yourself. However, even if you fall into the "I don't need one" category, having a business account might still be advantageous. Managing your business's income and expenses separately from your finances can simplify matters, mainly if your self-employment income constitutes a significant portion of your overall earnings.


As a general guideline, if you're deducting business expenses (e.g., travel costs, phone bills, or office supplies) from your income, consider a dedicated business account.


Advantages (with a few disadvantages) of maintaining a clear separation between personal and business finances


Business accounts function similarly to personal accounts. They allow you to establish payments, receive funds, and debit card transactions. Opting for a separate business account carries several benefits, albeit with a few drawbacks to consider:


**Pros:**


1. **Time and Admin Savings:** Keeping your business finances distinct from yours can save you time and administrative hassle. This separation is particularly beneficial when preparing your tax return for HMRC. All the necessary information and figures are neatly organised in one account. You won't have to sift through your account to determine if that fancy restaurant meal qualifies as a business expense, sparing you the confusion of whether a meal was a business meeting or a casual outing with friends.


Extending this advantage, a separate business account can prove invaluable if HMRC scrutinises your finances. Having a well-organised and distinct account means they won't need to delve into your finances during their investigation.


2. Business Credit Rating: Maintaining a separate business account allows you to build a credit history for your business. This is important if you apply for a business loan or credit card. A strong credit history for your business can increase your eligibility for such financial products. You may not qualify for these business-specific financial tools if you only have a personal account.


3. Compliance with Bank Terms: Personal bank accounts typically have terms and conditions prohibiting their use for business purposes. While freelancers receiving occasional transfers might not encounter issues, businesses with significant cash transactions, like a food truck, may violate these terms. Consequently, your bank may close your account or request that you open one of their designated business accounts.


Cons:


1. Fees: Business accounts often come with fees, unlike personal statements commonly available for free. Although digital reports with no monthly payments are emerging, most business accounts charge a monthly fee, typically around £5. Additionally, you may be charged for cash deposits, withdrawals, and certain other transactions.


2. Increased Administration: Maintaining two separate accounts means dealing with additional cards, statements, and passwords. However, the rationale behind this extra administration is to streamline your financial management now, potentially reducing the complexity when it's time to complete your tax return.


In summary, while there are some downsides, the advantages of separating personal and business finances are significant, especially regarding tax compliance, credit building, and adhering to bank terms and conditions.


What Documentation is Required to Open a Business Bank Account?


The documentation needed to open a business bank account depends on your business structure:


For Sole Traders and Freelancers: The requirements are similar to opening a personal account. Typically, you'll need a form of photo identification, such as a driver's license or passport, and proof of your address, often satisfied by a utility bill or mortgage statement.


For Limited Companies: Opening an account for a limited company involves more documentation. In addition to the items mentioned above, you'll generally be asked for details regarding your company's registration with Companies House. You'll likely need to provide your tax and VAT registration information.


If you're uncertain about the specific documentation required, consult with your chosen business account provider to clarify their requirements for opening your account.


Is my business bank account protected by the Financial Services Compensation Scheme (FSCS)?


Funds held in your business bank's current accounts or savings products are safeguarded by the Financial Services Compensation Scheme (FSCS). The coverage extends up to £85,000 per individual per financial institution.


The FSCS is an autonomous fund under the Financial Conduct Authority (FCA) regulation. Its primary commitment is to ensure that you will receive a portion of your funds as compensation in the event of a bank's collapse. However, it's important to note that access to your money may be temporarily restricted during the compensation process.


For more information on bank accounts and help with your business accounts, contact Accountax today. 01293 307084. admin@accountaxpoint.com


This guide is for illustrative purposes only Accountax can only advise on Taxation matters, through the appropriate protocols. Full Terms and Conditions available on request.

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